INTERNATIONAL BUSINESS PRACTICES
courtesy of Univ. of Missouri-St. Louis
INDIA
BUSINESS ORGANIZATIONS
The most common business entity used by foreign investors in India is the locally incorporated company. Branches, sole proprietorships and partnerships are essentially closed to foreign companies. Foreign investors may participate in either public or private companies. Private companies must restrict the transfer of their shares, limit the number of shareholders to 50 and prohibit any invitation to the public to subscribe for shares.
Public companies are those with more than 25 percent of their shares publicly owned; those that own more than 25 percent of the equity of a public company; those with a turnover of more than Rs 100 million in any one year.
Public and private companies must register the memorandum and articles of association with a state registrar of companies.
Foreign corporations may interact with Indian businesses in three other ways. The most common form of interaction is the licensing of technology, where no equity capital is involved. The foreign firm can sell its technology for a lump-sum payment and royalties based on sales. The second form of cooperation involves the direct purchase of designs and drawings. These forms of interaction are especially popular with the Indian government. They satisfy government policies designed to increase the amount of technology flow into the Indian economy. The third form of collaboration is joint venture arrangements which account for 15 to 20 percent of all foreign collaboration approved by the Indian government. The foreign firm may receive lump-sum and royalty payments for technology transfer as well as dividends.
Representative or liaison offices may be opened in India with approval by the Reserve Bank of India. These offices cannot accept orders or sign contracts and no profits can be generated by this type of office. Branch office activities in India may result in legal liability being imposed directly on foreign home offices for business activities in India. Franchising arrangements in India are very rare.
EXPORTING
Agents and Distributors: Agent-principal relations are governed by sections 182 to 238 of the India Contract Act. The types of commercial agents recognized under Indian law are brokers, auctioneers, del credere agents, and insurance agents.
Premature revocation or termination of an agreement by the principal without just cause requires that compensation be paid to the agent. Agent-principal relations may be terminated prematurely if the agent is guilty of misconduct in the discharge of duties. Depending on the agent-principal contract, the agreement may be terminated upon: expiration of the contract term; death or incapacity of the agent; death or incapacity of the principal; completion of the business; impossibility of execution by reason of law or destruction of the subject matter.
Companies choosing an agent for the Indian market should make sure that the agent has an office, or is located in Delhi. This will increase the chance that they receive up-to-date notice of policy changes and government procurement notices. The agent should be the main distributor since Indian law does not permit foreign companies to have marketing subsidiaries in India. The exclusive agency agreement is the most common type of agreement in India.
Import Restrictions: India's import licensing policy was designed to conserve foreign exchange and promote import substitution, but has been relaxed for the current five-year period. Under a new Import-Export Policy announced April 1, 1992, and effective for five years, most goods have become freely importable, no longer requiring import licenses. A sharply curtailed negative list remains in effect which: bans three items outright; bans all consumer items and computers valued at less the Rs 150,000 (US$ 5,000); restricts 68 items and reserves eight products for import by public sector trading companies. The revised policy has also abolished requirements that all goods be imported by the end-user, allowing imports for stock and sale by distributors and wholesalers.
Indian import controls still apply to some industrial items and most consumer goods. As a result, companies interested in the Indian market should become familiar with the licenses or other controls necessary for the import of their particular products.
Import Duties: Import duties are applied to almost all goods entering India. The tariff system is based on the Harmonized System (HS) with most tariffs being charged on an ad valorem basis. Tariffs are in the 40 to 60 percent range for basic raw materials, 60 to 100 percent for semi-processed goods, and 100 percent and above on finished and consumer goods. Luxury items can be taxed at rates up to 110 percent. Companies should check import duties for their particular product because rates are product specific.
Documentation: Shipments to India require a commercial invoice, a packing list and bill of lading. A certificate of origin is not required on imports originating in the United States.
FOREIGN INVESTMENT
In 1991, the government liberalized the number of industries open to foreign investment, loosened approval requirements and allowed majority foreign equity ownership. There are frequent changes in the regulations governing equity percentage permitted and the industries open to foreign participation. Companies wishing to enter the Indian market should make efforts to obtain the most up- to-date information.
Foreign investment is encouraged in large-scale projects, projects that will have a favorable impact on the Indian balance of payments position, and investment that will bring new technology to India. The government has designated a list of 34 high-priority industries open to foreign investors.
Rules and regulations governing foreign investment in India stipulate:
The following restrictions are placed on foreign investment: foreign investment in non-priority sectors is generally restricted to 40 percent of common stock; and restrictions on 100 percent foreign ownership may apply, depending on the nature of the business.
Incentives: No specific tax incentives exist to attract foreign investment. However, there are incentives available to Indian companies with some share of foreign ownership. Tax and non-tax incentives may be granted to businesses that will increase Indian exports. For example:
Some non-tax incentives are offered by the state governments. Examples of these include the availability of land on concessional terms, facilities for business use, and water and power at reduced rates.
COMMERCIAL POLICIES
Free-Trade Zones: India has six export processing zones. These facilities provide duty exemptions under certain conditions for the manufacture of export items. The zones are the Kandla Free-Trade Zone in Gujarat, the Santa Cruz Electronics Export Processing Zone (SEEPZ) in Bombay, the Madras EPZ in Madra, the Falta EPZ in West Bengal, the Cochin EPZ in Kerala and the New Okhla Industrial Development Area (NOIDA) EPZ.
Exchange Controls: The Reserve Bank of India (RBI) administers India's extensive foreign exchange controls and regulations. All foreign exchange transactions are subject to the control and approval of the RBI, including the transfer of profits and dividends. Controls on outflows of foreign funds are stringent due to India's foreign exchange shortage. The Indian government provides no guarantees against inconvertibility. Companies with 40 percent or more foreign equity are subject to certain provisions of the Foreign Exchange Regulations Act.
Regulations governing the remittance of dividends state that the foreign currency outflow due to dividends may not exceed export earnings and that automatic approval is granted on preference and equity shares up to certain limits. There are no limitations applied to interest payments on foreign loans although there are limits applied to the repatriation of capital. There is a cap on royalties paid under technology licensing agreements equal to eight percent of export sales or five percent of domestic sales.
Businesses can consult the Exchange Control Manual of the Reserve Bank of India for all rules and regulations governing India's foreign exchange controls regime.
INTELLECTUAL PROPERTY RIGHTS
Patents: Patents in India are protected under the Patent Act of 1970. The Act protects foreign companies on the same basis as Indian nationals as long as there is reciprocity of protection. An invention must be original, be the result of ingenuity, and have utility. India's Patent Act grants patent protection for 14 years from the date of filing. Stringent compulsory licensing provisions have the potential to render patent protection virtually meaningless. India's Patent Act prohibits patents for any invention intended or capable of being used as a food, drug or relating to substances prepared or produced by chemical processes. The process by which drugs, foods and related items are produced is patentable, but the patent term for these processes is limited to the shorter of five years from the grant of patent or seven years from patent application filing.
Trademarks: Trademarks are protected under The Trade and Merchandise Marks Act of 1958 which establishes the rights for the first user of the trademark. Trademarks are registered for seven years with renewal of the registration allowed for an additional seven-year period. Permission from the Reserve Bank of India must be obtained by foreign or Indian companies with 40 percent or more non-resident interest to use a trademark.
India is a member of the Universal Copyright Convention and the Berne Convention for the Protection of Literary and Artistic Works.
The Copyright Act 1957 provides protection during the author's life, plus 50 years after death.
TAXATION
Corporate Taxes: Indian corporate tax rates are high and the pertinent laws complex. The standard corporate income tax rates are 45 percent for public companies, 65 percent for branches of foreign companies and 50 percent for all other companies. If companies utilize tax incentives available to them, the typical rates vary between 30 and 50 percent. The tax rates are lowest for widely held companies incorporated in India. Companies are strongly encouraged to employ a tax specialist familiar with the Indian tax structure. A 25 percent tax is levied on dividends paid to non-resident corporate bodies, with a minimum 30 percent tax being applied if the non-resident is not a corporation. Interest is taxed at a rate of 25 percent, with a 3.125 percent surcharge. Royalties are taxed at a rate of 30 percent.
Personal Income Taxes: A resident of India is considered to be an individual who spends at least 183 days in India during a given year. Residents are taxed on a progressive sale ranging from 20 to 30 percent on their worldwide income. Non-residents are taxed only on the income arising from sources within India.
Other Taxes: There is a five percent sales tax applicable to most goods along with excise taxes on alcohol, drugs, automobiles, cosmetics, cigarettes and air conditioners. States also levy sales taxes ranging from four to 10 percent. A number of luxury, real estate and other taxes may also apply.
Tax Treaties: The United States and India have signed a treaty to avoid double taxation.
REGULATORY AGENCY
The Office of the Chief Controller of Imports and Exports (CCI&E) in the Ministry of Commerce issues import licenses.
USEFUL CONTACTS
U.S. Embassy in India New Delhi Shanti Path, Chanakyapuri 110021 Telephone: (91 11) 600651 Telex: 82065 USEM IN
Indian Embassy in the United States 2107 Massachusetts Avenue, NW Washington, DC 20008 Telephone: (202) 939-7000
Indian Chamber of Commerce 445 Park Avenue, 18th Floor New York, NY 10022 Telephone: (212) 755-7181
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This file extracted from Dept. of Commerce National Trade Databank (NTDB) CD-ROM, SuDoc C 1.88:993/11 by RCM of the Libraries of the University of Missouri-St. Louis, 11/29/1993 / IBPD0005
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